Victor González 欧谷国’s Post

“The mood in China is dismal. Indicators of domestic and foreign sentiment — household consumption, private investment and inflows of foreign capital — have been anaemic. Property values continue to fall and the stock market is in the doldrums, both reflecting and feeding into the sense that the economy is rudderless and that the government either doesn’t understand the gravity of the situation or doesn’t have a plan to stem the rot. Or both. The third plenum of the Chinese Communist party’s Central Committee, a major meeting that typically sets out a road map for economic policies in each five year cycle, is set to take place next week. The government had been expected to lay out a clear policy agenda and specific reforms, in addition to offering short-term stimulus to support growth. Those hopes might be dashed. Chinese Premier Li Qiang recently spoke about dealing with the symptoms as well as root causes of the current problems. But he offered few remedies.” “The plenum will no doubt yield rote statements about further reform and opening up. Those will land with a thud if the government fails to reinvigorate market-oriented reforms. The government is resisting the clamour for monetary and fiscal stimulus, for fear of creating financial risks and adding to its debt burden. To boost the economy after the pandemic, Beijing did issue a sizeable quantity of long-maturity government bonds to finance infrastructure and other spending. The central bank has eased monetary policy moderately, but credit growth remains weak. Private firms are not eager to invest in an uncertain environment. The government has also stimulated production in selected industries. Support has boosted sectors such as green energy and electric vehicles, which fits the goal of technological upgrading of manufacturing. Getting households to consume more, when their confidence is at a low ebb and they see their homes and stock market investments falling in value, has proven a tough.” “The focus on large scale capital-intensive manufacturing has limited employment growth, further restraining consumption. With consumption falling behind the rise in production capacity, deflationary pressures are proving persistent. As China tries to export its way out of its problems, trade tensions with other countriesare ratcheting up, adding to the gloom. The banking system looks sound but is not channelling resources to the more productive parts of the economy. Banks have little incentive to lend to small and medium sized enterprises, including in the service sector. Fixing incentives, along with broader capital market development, is a major priority.  Local governments are under financial duress. They account for a large share of overall spending while the central government collects most tax revenues. This model, which was already broken, has become unsustainable. China’s current problems are both cyclical and structural, and action is needed on multiple fronts.”

"The Politburo meeting also showed that China’s top leaders are aware of the problems on the ground and are willing to face them, removing another source of anxiety for investors. For some time, China has sent confusing signals to the market, going so far as to label not-so-positive economic views and comments as unwelcome or even acts of hostility." If that was the case, I hope it lasts until they are almost out of the woods. "China’s national security ministry threatened to go after those who dared to “short” the country’s assets through words or actions. Such warnings frightened investors away, as there’s no point going “long” if going “short” is not allowed." Not only China, but also Korea. But China does get a bad rap. "The Politburo statement last week, however, stated that China must face difficulties in a “straightforward” manner, an acknowledgement that the country’s economic woes are not just narrative nonsense to be rebuffed but real challenges to be tackled." "But it should be noted Beijing’s policy shift is much more than a cyclical adjustment. The change in tone from China’s top leaders in itself marks a milestone in the history of Beijing’s economic management. China’s leadership is showing the world that it listens, cares and respects the market. This deserves applause, and that is why the market reacted so fervently." Let me amend the last sentence: "China’s leadership is showing the world that it (can) listen, care and respect the market. This deserves applause, and that is why the market reacted so fervently." Is it enough? Because jobs don't magically appear without the means to pay salaries - sustainably. "More often than not, the state and the market were not on the same page, resulting in unnecessary competition, tensions, and losses. China’s once vibrant private equity market is a typical example of how interventionist state policies and government money have elbowed out market-oriented practices and institutions." Let me point out that Beijing has wanted to reduce local govt debt since 2014 (it grew), tried to cool the real estate industry since 2017 (trade war happened, Beijing blinked), tried to rationalise the steel industry (output kept going up) - it is as if directives were suggestions. And they were, Beijing told them to do A but not let GDP go down - the local govts responded by not letting GDP go down and continuing A, B, C, .... Beijing accepted it for years. "Some economists are right to note that Beijing’s latest policy package is not a silver bullet. China’s structural problems such as an ageing population and geopolitical tensions have no quick fixes, and there is still a question mark of how many trillions of yuan the finance ministry can set aside to arrest a property market slump." Li Qiang looks relieved though - which makes me think that the seniors in CCP told Xi to let Li handle the economy - because let's be frank, you're a tyro at understanding market forces.

A "dead cat bouncing?" - Today in a previous post "HK stocks fell for the first time in seven days," I wrote - "As the US$3 trillion market rally driven by China’s stimulus injection showed signs of exhaustion." With the plunge in HK stocks, I share an Oct 1 article penned by Stephen Roach for FT. The Yale faculty member and former chairman of Morgan Stanley Asia offered his views on the recent policy stimulus led by PBOC and the Politburo's message of more to come and whether the China’s economic difficulties are now over - "If it were only that easy. China is at risk of falling into a Japanese-like quagmire characterised by stagnation and deflation as a result of the bursting of a major debt-fuelled asset bubble. The comparison is far from perfect. China still has untapped sources of future growth — namely, household consumption, urbanisation and insufficient capital endowment of its large workforce. China also benefits from understanding the lessons of Japan as underscored by a famous warning on the issue by an unnamed “authoritative person” on the front page of People’s Daily back in May 2016. Being forewarned, however, is not the same as being pre-emptive. The jury is still out on whether China has succumbed to the Japanese disease. But Chinese policymakers should err on the side of acceptance rather than denial of the need for action. China has experienced its most severe whiff of deflation since the 1980s, as well as a growth shock on a par with that in Japan. China’s GDP growth rate is decelerating by six percentage points from the 10 per cent surge from 1980 to 2010 to the IMF’s projected increase of around 4 per cent over the next five years, virtually the same as that which hit Japan when its economic growth went from 7.25 per cent from 1946-90 to just 0.8 per cent from 1991 to 2023. Japan not only provided a template of what to avoid but the “Abenomics” framework of the late prime minister Shinzo Abe offered a prescription for how to get out of the quagmire. It was broken down into three “arrows”, as Abe dubbed them — monetary, fiscal, and structural. The theory was simple: powerful fiscal and monetary stimuli were necessary to provide Japan with escape velocity while structural reforms were vital for an enduring recovery. In the end, Japan lacked the political will for the heavy lifting of structural change. Could the same fate await China?" In an interview yesterday with CNBC's Melissa Lee, he compared the recent explosive rally in the Chinese equity market to the following passage in his article, and described it potentially as a "dead cat bouncing" - "...The Japanese experience provides an important perspective, as the Nikkei 225 Index bounced four times by an average of 34 per cent on its way to a 66 per cent cumulative drop from December 1989 to September 1998." Of note, Roach wrote a controversial article "It pains me to say Hong Kong is over" in Feb this year. Q4 metrics will be telling. #china #economy #market

Nice to see our Asia Society product "Decoding Chinese Politics" used by The Economist in this recent article. DCP maps the formal institutions, informal networks, and key decision-makers that shape policymaking: DCP: https://lnkd.in/eJ_3yDd8 From the article: "He [Lifeng] last year oversaw the appointment of Li Yunze as the head of China’s new financial super-regulator, which covers both banking and insurance. This new body has also taken on some of the supervisory responsibilities previously held by the People’s Bank of China. The central bank has never enjoyed the autonomy or stature granted to monetary authorities elsewhere. Its governor, Pan Gongsheng, holds a phd and is probably a better economist than any of the policymakers above him. But the bank nonetheless appears to be losing staff and status. According to 'Decoding Chinese Politics', a project of the Asia Society Policy Institute, another think-tank in America, Mr He has personal links with officials across China’s economic-policymaking apparatus. Liu Kun, his classmate at Xiamen University in Fujian, served as finance minister until 2023 and helped pick the current holder of that office, Lan Fo’an. The head of China’s anti-monopoly agency, Luo Wen, spent a year as Mr He’s deputy when he was head of the National Development and Reform Commission (ndrc), China’s main planning agency. The current head of the NDRC, Zheng Shanjie, also comes from Fujian province and worked under Mr He in Xiamen. He once criticised local officials in another coastal city for their complacency. “If you don’t make progress, you are regressing; if you progress slowly, you are regressing.” His own progress has been impressive. In 1997, he was the manager of a cod-liver-oil factory, having risen up the ranks from a job in equipment maintenance." https://lnkd.in/eFMdhrtc

A Chinese flag flutters on top of the Great Hall of the People ahead of the opening ceremony of the Belt and Road Forum (BRF), to mark 10th anniversary of the Belt and Road Initiative, in Beijing, China October 18, 2023. Edgar Su | Reuters BEIJING — China is set this week to kick off its annual parliamentary meetings, which investors are watching closely for signals on economic stimulus. The country’s gross domestic product grew by 5.2% in 2023, but overall recovery from the Covid-19 pandemic was slower than many had expected. A prolonged slump in the massive real estate market and falling global demand for Chinese exports have contributed to low levels of consumer and business sentiment. That’s all led to questions over whether Beijing will step in with large-scale support. So far, authorities have been relatively reserved. Beijing signaled in December that any new policy support would be “appropriate,” said Wang Jun, chief economist at Huatai Asset Management, adding “there’s no way” that stimulus would be as large as it was in 2008. That’s according to a CNBC translation of his Mandarin-language remarks. China’s economic policy is typically set at an annual meeting in December by leaders within the ruling Communist Party of China. The meetings this month, known as the “Two Sessions,” are at the government, instead of party, level and typically release more details on policy plans, such as the GDP target for the year. Wang said he is watching for comments on authorities’ plans for the real estate sector, capital markets and local government finances. Back in 2008, when the world was reeling from the financial crisis, China unleashed a massive stimulus package to sustain growth with greater demand. While the economy rebounded, the measures drew criticism for a resulting surge in local government debt. Beijing in recent years has emphasized the need to stem financial risks and clamped down on real estate developers’ high reliance on debt for growth, an issue tied to local government finances. This time around, China’s monetary policy also faces constraints on how far it can deviate from the U.S. Federal Reserve’s interest rate path. GDP and other economic targets The Chinese People’s Political Consultative Conference, an advisory body, is set to kick off its annual meeting on Monday. The following day the National People’s Congress legislature is due to begin its meeting. Tuesday is also when the country’s premier is expected to share the year’s targets for GDP, employment and other economic indicators in what’s called the “Government Work Report.” “The target will likely remain relatively high,” said Bank of China’s chief researcher Zong Liang, noting GDP grew by 5.2% last year. That’s according to a CNBC translation of his Mandarin-language remarks. He expects the target for the fiscal deficit will be around 3.5% and that monetary policy will also be relatively

Chinese official: The deeper the reform goes, the more complex and acute the conflicts of interest it touches On Friday, Chinese officials conceded that the extensive array of economic objectives reaffirmed at the culmination of a pivotal Communist Party meeting this week encompasses "many complex contradictions" signaling a challenging trajectory for the implementation of policies. The year has seen escalating calls for profound transformations in the operational dynamics of the globe's second-largest economy, amid a backdrop of plummeting consumer and business confidence within the nation and mounting apprehension among international leaders regarding China's supremacy in exports. https://bit.ly/4f67xZ1 In the aftermath of the third plenum meeting presided over by President Xi Jinping authorities announced a series of promises that appear to be at odds with each other, ranging from the modernization of the industrial sector to the amplification of domestic consumption, alongside efforts to foster economic expansion while also mitigating the perils associated with indebtedness. https://bit.ly/4f7pZjP Following the four-day meeting anticipation is building for the release of a document by China, anticipated to elaborate on the policy strategies in the ensuing days. However, the initial declaration following the plenum, which heavily mirrored China's established strategic framework, has led to disenchantment among some economists. Alicia Garcia Herrero, the Chief Economist for Asia-Pacific at Natixis, expressed disillusionment, remarking,“Nothing new under the sun: the same industrial policies, the same sense of things." "Really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing. So, it’s really disappointing.” https://bit.ly/3SczAMt The growing consensus is that absent a fundamental realignment that elevates the role of consumers within the economy, the pace of accruing debt will eclipse growth, necessitated by the financing of Beijing's ambitions for industrial modernization and global ascendancy. This elevates the stakes considerably. Certain analysts caution that the present course harbors the potential for engendering a protracted epoch of near-stagnation, coupled with enduring threats of deflation akin to the scenario witnessed in Japan since the 1990s. According to Reuters, Julian Evans-Pritchard, the Senior China Economist at Capital Economics, prognosticates, ""High debt levels plus increasing deflationary pressures eventually could result in a Japan-style ... low growth and very low inflation." "That might only happen in a few years’ time." Speaking at a media briefing on Friday along with other Party officials, Tang Fangyu, deputy director of the central committee's policy research office, acknowledged the challenges. "The deeper the reform goes, the more complex and acute the conflicts of interest it touches," Tang said. Picture credit: The Gulf Today #china

Chinese official: The deeper the reform goes, the more complex and acute the conflicts of interest it touches On Friday, Chinese officials conceded that the extensive array of economic objectives reaffirmed at the culmination of a pivotal Communist Party meeting this week encompasses "many complex contradictions" signaling a challenging trajectory for the implementation of policies. The year has seen escalating calls for profound transformations in the operational dynamics of the globe's second-largest economy, amid a backdrop of plummeting consumer and business confidence within the nation and mounting apprehension among international leaders regarding China's supremacy in exports. https://bit.ly/4f67xZ1 In the aftermath of the third plenum meeting presided over by President Xi Jinping authorities announced a series of promises that appear to be at odds with each other, ranging from the modernization of the industrial sector to the amplification of domestic consumption, alongside efforts to foster economic expansion while also mitigating the perils associated with indebtedness. https://bit.ly/4f7pZjP Following the four-day meeting anticipation is building for the release of a document by China, anticipated to elaborate on the policy strategies in the ensuing days. However, the initial declaration following the plenum, which heavily mirrored China's established strategic framework, has led to disenchantment among some economists. Alicia Garcia Herrero, the Chief Economist for Asia-Pacific at Natixis, expressed disillusionment, remarking,“Nothing new under the sun: the same industrial policies, the same sense of things." "Really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing. So, it’s really disappointing.” https://bit.ly/3SczAMt The growing consensus is that absent a fundamental realignment that elevates the role of consumers within the economy, the pace of accruing debt will eclipse growth, necessitated by the financing of Beijing's ambitions for industrial modernization and global ascendancy. This elevates the stakes considerably. Certain analysts caution that the present course harbors the potential for engendering a protracted epoch of near-stagnation, coupled with enduring threats of deflation akin to the scenario witnessed in Japan since the 1990s. According to Reuters, Julian Evans-Pritchard, the Senior China Economist at Capital Economics, prognosticates, ""High debt levels plus increasing deflationary pressures eventually could result in a Japan-style ... low growth and very low inflation." "That might only happen in a few years’ time." Speaking at a media briefing on Friday along with other Party officials, Tang Fangyu, deputy director of the central committee's policy research office, acknowledged the challenges. "The deeper the reform goes, the more complex and acute the conflicts of interest it touches," Tang said. Picture credit: The Gulf Today #china

Conventional wisdom suggests the economic downturns we see in China might temper aggressive foreign policy. But is it so? As all observers know, the CCP has consistently prioritised military modernisation and territorial claims, even amidst weak wealth growth and financial sector pressures. Recent data indicating a 13% reduction in Western financial institutions' investment banking workforce in China might typically signal a retreat from aggressive geopolitical stances. However, China's 2024 military budget increase of 7.2%, outpacing its economic growth target, suggests otherwise. This apparent contradiction invites a fresh perspective on the CCP's strategic calculus. I, along with many others, maintain China's sick economy is a barrier to waging war. But there is an alternative perspective. Rather than viewing economic challenges as constraints on military ambitions, we might look at them as catalysts for a more assertive posture. The CCP's legitimacy, long predicated on economic performance, may increasingly rely on nationalism and the promise of national rejuvenation, including the resolution of territorial disputes. The CCP's approach to Taiwan and the South China Sea could be seen as part of a broader economic strategy couched in nationalism. Military modernisation drives technological innovation and supports key industries, potentially offering a path to economic revitalisation. This dual-use approach to military spending could provide a rationale for maintaining, or even increasing, defence budgets during this economic downturn. The CCP's usually takes a long-term view. This allows it to weather short-term economic fluctuations without significantly altering its strategic goals. This steadfastness in the face of economic headwinds to an extent enhances China's negotiating position on the global stage, projecting an image of unwavering resolve. How the people will see these long-term CCP priorities is a serious question. Is the concern putting food on the table in 10 years, or tonight? It can go either way; nationalism is a fickle thing. Sabre-rattling might be a welcome jingoistic ploy by the CCP to divert the population from not being able to pay rent. But an expensive global war? There are limits. As we grapple with China's economic trajectory and geopolitical aspirations, we need to recognise the medusa that is CCP decision-making. Economic indicators alone are not a complete picture of China's future actions regarding Taiwan and the South China Sea. A holistic analysis incorporating economic, political, and strategic factors is essential for interpreting China's moves. We are all left guessing as to ultimately what the plan is. Bottom line: can jingoism trump the economy? #ChinaEconomy #GeopoliticalStrategy #CCPLegitimacy #China #MilitaryModernisation Institute for Security and Development Policy (ISDP) Niklas Swanstrom Anna Jarmuth Mats Engman Jagannath Panda Agust Börjesson Yi-Chieh Chen Filip Borges Månsson

Through the second half of 2023, the gap between China’s impressive official data and visibly underwhelming consumer demand, unresolved local government debt problems and an unprecedented drop in foreign direct investment was stark. The China Pathfinder framework scans for evidence of market policy reorientation to fix these problems. But in this coverage period (July–December 2023), Beijing’s response was limited. Officials redoubled efforts (and incentives) to encourage foreign investment and trade, pledged to loosen cross-border data transfer rules, and increased deficit spending limits to stoke anemic demand. China’s government also simultaneously threatened economists with consequences for even talking about bearish signals and discontinued unflattering economic data, severely aggravating credibility concerns. Policymakers did next to nothing to tackle the real structural problems. Though we expect the severity of 2022–23 declines to set China up for a modest cyclical rebound in 2024, long-term growth potential will disappoint until fundamentals are addressed.